You may not need to save as much for retirement as you think

27 October 2017

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Many people want to get to a position where they can “live off the interest”, or where their passive income exceeds the cost of their lifestyle.

This is a laudable goal. But for many people it’s unrealistic – if everyone got there, the economy wouldn’t work. I also think it creates some unnecessary pressure when people think about their retirement plans and expectations.

Consider the following scenarios, based on a couple heading into retirement with an investment portfolio of $1 million. Let’s over-simplify wildly and assume that they will receive a constant, after-inflation, after-tax return of 3% per year.

A 3% return on $1 million is $30,000 per year. Let’s assume they are 65 and they receive NZ Super of $31,000 per year. For many people, $61,000 per year isn’t too bad – especially if they have a mortgage-free home.

If they only spend their investment returns of $30,000 per year (plus NZ Super), the capital balance of their investments over 30 years looks like this:

Nice and simple. It doesn’t change because they are only spending the income they generate.

Their children can probably look forward to a nice inheritance and should be able to fly first class when that happens.

BUT! What if…

Instead of spending $30,000 per year ($61,000 including NZ Super), this couple decided they wanted to spend a little more in their retirement? Could they do it?

Yes! The chart below makes the same assumptions as above, but involves the couple drawing down $40,000 per year rather than $30,000. That’s nearly $200 per week extra they can use to enjoy life.

Sure, they are spending some of their capital. But given these assumptions (constant investment returns; constant expenditure; etc), they will still have approximately $500,000 after 30 years – by the time they’re 95. That’s a decent buffer, and the kids will still end up with an inheritance.

Increase expenditure to $50,000, and they’ve still got some money by the time they’re 95:

The scenarios above are wild simplifications. Investment returns will vary. Expenditure will vary, based on a number of factors. Who knows what your health will be. And although the graphs forecast a 30 year time period, who knows how long you’ll live.

Different people also have different expectations about what they want to leave in their estate when they pass away. This is a factor when considering how you spend your capital in retirement.

Different people also require different levels of comfort. Spending only your investment returns means that you’ve got a significant buffer in case anything doesn’t go as planned, or one of your many assumptions is wrong and the adjustment isn’t in your favour. The third scenario above, where you spend $50,000 per year and have little left after 30 years, is more attractive to someone who can tolerate a higher level of uncertainty and understands that spending more now may mean limiting their expenditure in the future.

The key thing I want people to take away from this article is that it’s not the end of the world if you use your capital during your retirement. If you manage the “decumulation” of your capital appropriately, you should end up just fine – while enjoying a higher quality of life.

It may also give you some peace of mind that if you have a certain lifestyle planned for your retirement, it isn’t the end of the world if you don’t save enough for your passive income to cover your expenditure.

If you knew, for example, that you were going to die in your 30th year of retirement (or were happy to plan as such), and knew your returns would stay constant at 3% of your capital per year, you would only need about $600,000 to support payments of $30,000 per year on top of NZ super. That should take some of the pressure off compared to having to save $1 million!

(More specifically,’s Retirement Calculator suggests that a portfolio of $635,935 should be sufficient.)


decumulation, retirement, saving

About the author 

Sonnie Bailey

Sonnie provides financial planning services via his business, Fairhaven Wealth ( Fairhaven Wealth provides independent, advice-only, fixed-fee financial planning services. Sonnie is also a “recovering lawyer”: he has specialised in financial services, trusts, and estate planning.

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